China raised its benchmark rate today by 25 Bp to 5.56% to curb its inflationary pressure and fast rising prices. This marks the first rate increase in 3 years and came as a surprise move to many economists.
The move by China is seen as a commitment to curb inflation which has been rising for the past two years and is expected to reach the 4% mark when September CPI figures are reported later this week.
The deposit rate, interest rate earned by Chinese bank customers, was raised by the same amount to 2.5% which still falls short of the prevailing inflation rate.
The move is also intended to strengthen the yuan-renminbi; a much debated issue between the US and China, but the dollar reacted adversely and strengthened in intra-day trading.
The Brazilian intervention
Brazil has been battling a strong real because of the high foreign capital inflow by investors that seek higher returns.
Guido Mantega, Brazil’s Finance Minister, imposed a 4% tax this month on any new capital inflows and again today raised the tax imposition to 6% to curb the vast amount of capital.
The measure does not seem to be adequate as the real has appreciated versus the dollar by 7% in the last three months.
Thailand imposes tax
Thailand announced it would impose a 15% at-source tax on any interest derived from domestic bonds held by foreigners to discourage and slow down the continued capital inflow.
The Thai Baht has risen to a 13 year high against the dollar but the central bank is expected to keep interest rates at the 1.75% for the time being.
It is clear that several emerging economies are struggling to keep their inflation, prices and currencies under control in the absence of any US intervention to strengthen the dollar.
Treasury Secretary Timothy Geithner announced earlier this morning in California that “the US cannot devalue itself out of this crisis”. The announcement resulted in a strengthening of the dollar despite the China announcement.
The message from Mr. Geithner sends a mixed message to the market prior to the next G20 meeting in Seoul, South Korea and the upcoming IMF meeting.
How one has to interpret Mr. Geithner’s policy of demanding China to revalue the yuan-renminbi and yet on the other hand would support a stronger dollar is a question mark for any economist and analyst.
The markets are clearly confused today and most of the large swings in the dollar and commodities are due to traders preparing for a neutral position by consolidating their short dollar contracts with their long commodities contracts, at least until after the mid-term election.
Brazil, Thailand, South Korea and Japan continue to protect not only their currency but also their much needed exports, awaiting a clear US policy for the foreseeable future.
The debate or the currency war is no longer about China and the US. It is also about emerging economies trying to figure out how to position themselves versus a dollar decision and hoping that the US will intervene and strengthen its currency to take the pressure off the international currency and trade markets.
There is one thing international markets dislike and that is uncertainty but until then, sandwich or butterfly hedging is a key strategy to survival.
Written by Nick Doms © 2010, all rights reserved.